Iran's Leaders Send Sobering Message: No Quick Economic Fix

Two Iranian textile merchants wait for customers in Tehran's main bazaar. President Hassan Rouhani has raised hopes by reaching out to the West and promising to work for an end to sanctions. But his team has cautioned that the country's economic problems have deep roots.

Vahid Salemi
/ AP

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Originally published on October 13, 2013 11:21 pm

The U.S. and its Western allies have not been able to win the nuclear concessions they have sought from Iran. But they have been able to inflict considerable economic pain through sanctions.

But now, Iran's call for a nuclear agreement and an end to sanctions has raised hopes among Iranians that better economic times may be ahead. The Iranian currency has stabilized somewhat since the election of President Hassan Rouhani, although inflation and unemployment remain high.

But Rouhani's economic team is already warning that ending sanctions on the banking and oil sectors, a difficult task in itself, won't end the country's economic woes.

"To think that sanctions will be lifted in the near future and all problems will be solved is a false alarm," says Economy Minister Ali Tayyebnia, according to Iranian media. He added that the Islamic Republic still needs to deal with "inappropriate economic policies and ineffective economic models."

Rouhani's early tenure has been marked by a new candor in assessing Iran's economy, including analysis of mismanagement and institutional flaws that have nothing to do with the sanctions.

Criticism Of Past Policies

A revealing example was a half-hour documentary aired by English-language Press TV shortly before Rouhani's inauguration. It gave outgoing president Mahmoud Ahmadinejad ample time to defend his policies, but his critics were also given free rein to make unusually blunt observations.

In response to one of the good-news announcements Ahmadinejad made near the end of his term, the clearing of a $30 billion debt owed to Iran's Central Bank, lawmaker Alireza Mahjoub was contemptuous.

He pointed out that the so-called "payment" was canceled by Parliament because it would have used the central bank's own profits from currency trading.

"The administration has made an artificial loan, as well as an artificial debt, and paid it with a fake income," snapped Mahjoub, "while this $30 billion was a real debt."

Admittedly, Ahmadinejad's relations with the parliament were frosty at best, but economists are equally withering.

"Officials have always showed their interest in job creating, but methods used to create jobs have never been compatible with the objectives," Khoshchehreh said. "Our officials adopted simple-minded approaches to solve the problem."

Another Iranian economist interviewed for the documentary, Vahid Shaghaghi, said the government failed to weed out non-productive sectors of the economy and its well-intended effort to reduce the country's expensive regime of subsidies was implemented badly.

"Price liberalization should be sudden and at once," he said. "Gradual release of prices led to a higher inflation rate; other countries' experiences in price liberalization prove this."

A Mostly State-Run Economy

One problem, economists say, is that Tehran's moves to privatize its largely state-run economy were problematic at best.

At a conference organized by the London-based think tank the Legatum Institute, U.S. government economist Mohammad Javan-Pardar said his research shows that what Iran touted as privatization was actually a transfer of power to quasi-private entities and the powerful Revolutionary Guard Corps.

The Guard has been taking over large chunks of the Iranian economy since the late 1990s.

"Particularly in the case of the Revolutionary Guards, whenever they took over a company, you usually saw civil citizens were actually fired and Revolutionary Guard generals replaced them," he said, "which most management gurus would not consider the best move to actually increase the productivity or the profitability of a company."

Nuclear Obstacles Remain

As Rouhani's cabinet settles in, the message that ending sanctions, hard as that is, won't solve the country's problems is beginning to be reinforced.

Analyst Scott Lucas at the U.K.'s University of Birmingham says the new administration seems to grasp that there's no quick economic fix.

"They've got a real problem in that some of the production sectors are badly limited, need a lot of investment, need re-fitting [and] retooling, especially the energy sector, which is where they're really scrambling to get foreign investment back in," Lucas says.

"And then beyond all this, they got this really horrible budget from March from the Ahmadinejad administration, because Ahmadinejad in the last couple years didn't really give a damn about how much he ran up in terms of a government deficit," he adds.

Other analysts do see rays of hope for Iran, noting that pro-private sector figures now occupy important posts in the Rouhani administration. Whether they will be granted the time and support to make major economic improvements, however, depends in part on whether Rouhani's bet on a swift nuclear agreement and easing of sanctions pays off.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

DAVID GREENE, HOST:

In Iran the economy is improving - a bit - on speculation that talks over the country's nuclear program could ease international sanctions. The volatile Iranian currency has stabilized some, although inflation and unemployment remain high.

NPR's Peter Kenyon reports that the country's economy has some deep-rooted economic problems that go far beyond the sanctions.

PETER KENYON, BYLINE: One change wrought by Hasan Rouhani's surprise election win has been a new willingness in Tehran to acknowledge the pain caused by international sanctions. Another has been an unusual candor in assessing Iran's economy overall, including analysis of mismanagement and institutional flaws that have nothing to do with the sanctions.

A revealing example was a half-hour documentary aired by English-language Press TV shortly before Rouhani's inauguration. It gave outgoing president Mahmoud Ahmadinejad ample time to defend his policies, but his critics were also given free rein to air unusually sharp criticisms.

Consider this response to one of the good-news announcements Ahmadinejad made near the end of his term, the clearing of a $30 billion debt owed to the central bank. Lawmaker Alireza Mahjoub was contemptuous as he pointed out that the so-called payment was canceled by parliament because it would have used the central bank's own profits from currency trading.

ALIREZA MAHJOUB: (Through Translator) The administration has made an artificial loan, as well as an artificial debt, and paid it with a fake income, while this $30 billion was a real debt.

MOHAMMAD KHOSHCHEHREH: (Through Translator) Officials have always showed their interest in job-creating, but methods used to create jobs have never been compatible with the objectives. Our officials adopted simple-minded approaches to solve the problem.

KENYON: Another Iranian economist, Vahid Shaghaghi, says the government failed to weed out non-productive sectors of the economy, and its well-intended effort to reduce the country's expensive regime of subsidies was implemented badly.

VAHID SHAGHAGHI: Price liberalization should be sudden and at once. Gradual release of prices led to a higher inflation rate - other countries' experiences in price liberalization prove this.

KENYON: One problem, economists say, is that Tehran's moves to privatize its largely state-run economy were problematic at best, mainly benefiting quasi-private entities and the powerful Revolutionary Guard Corps, which has been taking over large chunks of the economy since the late 1990s. U.S. government economist Mohammad Javan-Pardar spoke at a conference organized by the London think tank the Legatum Institute.

MOHAMMAD JAVAN-PARDAR: Particularly in the case of the Revolutionary Guards, whenever they took over a company, you usually saw civil citizens were actually fired and the Revolutionary Guards' generals replaced them, which most management gurus would not consider the best move to actually increase the productivity or the profitability of a company.

KENYON: As Rouhani's cabinet settles in, the message that ending sanctions - hard as that is - won't solve the country's problems is beginning to be reinforced. Economy minister Ali Tayyebni says to think that lifting sanctions will solve things is a false dream, because that will still leave what he calls inappropriate economic policies and ineffective economic models to deal with.

Analyst Scott Lucas at England's University of Birmingham says the new administration seems to grasp that there's no quick economic fix.

SCOTT LUCAS: They've got a real problem in that some of the production sectors are badly, badly limited, need a lot of investment, need re-fitting, retooling, especially energy sector, which is where they're really scrambling to get foreign investment back in. And then beyond all this, they got this really horrible budget from March from the Ahmadinejad administration, because Ahmadinejad in the last couple years didn't really give a damn about how much he ran up in terms of a government deficit.

KENYON: Other analysts do see rays of hope for Iran, noting that pro-private sector figures now occupy important posts in the Rouhani administration. Whether they will be granted the time and support to make major economic improvements, however, depends in part on whether Rouhani's bet on a swift nuclear agreement and easing of sanctions pays off.